Money Management - April 2004

Setting Investment Priorities

The First Step to Security

by Margaret Maul

An investment strategy is only as good as the priorities on which it is based. Whether starting out or adjusting investment game plans with age, setting priorities is always the first and most important step. Yet many people ignore this step and dive into an investment program that makes no sense for their lifestyle and won't accomplish their goals, primarily because they didn't take the time to clearly articulate and commit to those goals.

As an investment advisor, when I first meet with a client, I recommend they narrow their objectives. People generally have so many dreams and desires that limiting their focus can be a time consuming process, especially if they have never done it before. First put pen to paper and list every financial goal imaginable. Then list those goals in order of priority. After that, carefully and concisely explain why each one is important. At this point, it’s most likely the original priorities will shift.

Depending on age, typical goals often include buying a new home, furnishing that home, paying for a child’s education or saving for college tuition, getting out of debt, changing careers, retiring and – a rather recent development unique to baby-boomers – caring for elderly parents.

Age is an essential element in any investment strategy. A younger person can afford to put less money away each month and make volatile investments, while older individuals, if they haven’t been saving all along, need to set aside more money and limit investments to less volatile avenues. Yet, there are no hard-and-fast rules when it comes to age. An effective investment strategy, no matter what age, should be based on individual goals.

Why go through these mental gymnastics? Goals often conflict with one another. By identifying which goals will be of the most benefit, and which will cause harm if postponed, a practical investment strategy will begin to emerge. It will also help to determine such factors as an investor’s level of risk tolerance.

If the investment strategy is going to affect a spouse or significant other, that individual should be an integral part in establishing priorities. Open and honest communication about spending habits, as well as attitudes toward money, is essential to long-term financial security.

Now comes the really hard part. Create a budget. It’s the only systematic way to make sure money is being used in accordance with a financial plan. As a first step, identify current spending habits. Second, evaluate that spending pattern and adjust it with the financial goals in mind. Third, set spending guidelines and track future spending patterns within those parameters. Remember, within any budget, to pay yourself first – 10 percent of net income is ideal.

After priorities are set and a budget is created, efforts should be focused on achieving those goals at the top of the list. A professional investment advisor can help put together an investment plan that leads to meeting these objectives. However, it’s still up to the individual to be aware of his or her own financial health. For example, it does very little good to meet with a financial advisor in the morning and, in the afternoon, make a major, yet unnecessary, purchase that doesn’t take you closer to your financial goals.

Always ask, "Will this purchase take me closer to my goals or further away?"

The best advice: Don’t wait. Start now, review goals annually and reevaluate them at least every three years.

Margaret Maul
Margaret Maul is the president of Maul Capital Management, a Las Vegas-based investment advisory firm.